Moody’s Lowered Ethiopia Rating ahead of Further Downgrade
Due to a weak macroeconomic condition, Moody’s Investors Service has today downgraded the Government of Ethiopia’s long-term issuer and senior unsecured ratings to Caa1 from B2 and maintained the review for further downgrade.
The downgrade to Caa1 reflects Moody’s view that protracted deliberations regarding Ethiopia’s application for debt relief under the G-20 common framework have increased the risk of private sector creditors incurring losses.
The passage of time since Ethiopia’s application to the Common Framework suggests a relatively complex decision by the common framework’s creditor committee, which in turn indicates that an outcome that does not impose any losses on private sector creditors is less likely than at the time of Moody’s previous rating action in March.
Moreover, heightened domestic political tensions risk interfering with official sector support and undermining foreign investment that is critical for the government’s financing in the near and medium-term.
While the rating downgrade indicates that the risks have risen to a point no longer consistent with the previous rating, the Caa1 long-term issuer ratings acknowledge that there remain a number of potential outcomes that do not involve private creditors incurring losses.
Maintaining the review for downgrade will allow Moody’s to assess the progress of the official creditor committee deliberations regarding the extent of relief that Ethiopia requires, and the apportionment of that relief to the various creditors, including private creditors.
The review period will also allow Moody’s to assess Ethiopia’s financing situation following the IMF’s executive board assessment of the first and second reviews under the IMF programme and the outcome of the spectrum license auction and asset sales.
The long-term local currency (LC) ceiling has been lowered to B2 from Ba3, while the foreign currency (FC) ceiling has been lowered to Caa1 from B2.
Country ceilings indicate the highest rating level that would generally be assigned to the financially strongest issuers domiciled in a country, including the strongest structured finance transactions whose cash flows are generated predominantly from domestic assets or residents.
The LC country ceiling, two notches above the sovereign rating, which is a relatively narrow gap, reflects Moody’s assessment of non-diversifiable risks taking into account the extensive footprint of government in the economy, with very limited private sector activity, a very large state-owned enterprise sector, and government ownership of the majority of the banking system, as well as a weak institutional framework.
The FC country ceiling is two notches below the LC country ceiling, a relatively wide gap, reflecting Moody’s assessment of elevated transfer & convertibility risks, given a relatively closed capital account and very constrained access to foreign exchange.
RATIONALE FOR DOWNGRADE
There has been little progress since Ethiopia’s 1 February announcement that it intended to seek debt treatment under the Common Framework. Prolonged deliberations about the precise application of the Common Framework to Ethiopia point to increased risk for private sector creditors.
As already communicated in the last rating action, Moody’s assesses that the decision whether or not to enforce comparable treatment of official and private sector lenders in the implementation of the Common Framework for Ethiopia will be official lenders’ decision.
The requisite debt sustainability analysis has yet to be revealed, while the official creditor committee has yet to be convened to determine the magnitude and apportionment of relief across the various creditor classes.
The passage of time since Ethiopia’s application to the Common Framework suggests a relatively complex decision by the creditor committee, which in turn indicates that an outcome that does not impose any losses on private sector creditors is less likely than at the time of Moody’s previous rating action in March.
While the authorities reached a staff-level agreement on the first and second reviews of the Extended Credit Facility and Extended Fund Facility in February, the reviews have yet to be presented to the IMF executive board, which is critical for catalysing bilateral and multilateral lenders’ funding of the budget for fiscal 2021 and fiscal 2022.
Meanwhile, heightened domestic political tensions pose risks, potentially interfering with official sector support and undermining foreign investor interest in the country’s economic liberalisation agenda, both of which are also essential to the government’s financing in the near and medium term.
Moody’s Lowered Ethiopia Rating ahead of Further Downgrade
